India should tap global cryptocurrencies to fund small and medium enterprises that are starved of funds, homegrown software products think tank, the Indian Software Product Industry RoundTable (iSPIRT), said.
This can be done by allowing validated investors through Indian and global exchanges, which will help bridge the SME financing gap of as much as $500 million in the country, it said.
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“India could offer a viable path to deploy this new crypto wealth in a controlled manner, while solving for SME financial inclusion,” iSPIRT authors led by fintech specialist Sanjay Phadke said in a blog post on Saturday.
“India has a unique opportunity to close the SME financing gap by attracting the new class of global crypto investors, by using everything the IndiaStack team has helped build over the last decade — particularly UPI, Aadhaar, GST, and the informational collateral they generate — to help connect the trillion-dollar crypto economy to capital-hungry Indian entrepreneurs,” it said.
The call for such a funding push comes at time when the government is mulling a legislation to ban crypto currencies and introducing a central bank-regulated digital currency for the country.
In March, the Supreme Court struck down the Reserve Bank of India’s restrictions on using banking channels to buy or trade in cryptocurrency, which had limited trading of bitcoins to only peer-to-peer transactions.
“How does India become a $5T economy? We’ll need to close the $250B financing gap for India’s small businesses by attracting global, risk-tolerant pools of capital — and as iSPIRT details, the rapidly growing crypto-economy may be one of the key ways,” Infosys chairman Nandan Nilekani, who is a mentor for iSPIRT, wrote on microblogging platform Twitter.
According to the blog post, 25% of SMEs have only 25% of the $1 trillion of the commercial lending exposure of the banking system, which has resulted in a financing gap of around $250-$500 billion. Many SMEs are not able to access capital for growth, it said.
“India’s next trillion in GDP growth depends upon solving this problem, but the incumbent financial system may not have the resources to fix it alone. Despite ever-increasing bank branches, India’s legacy financial system is still slow, costly, and unwieldy for borrowers— in sharp contrast to the databases, online KYC systems and intelligent lending apps of new-age fintech companies,” it pointed out.
The inflow of cryptocurrencies from KYC compliant investors through approved Indian and global exchanges can potentially be allowed into India to enhance SMEs’ access to low-cost global capital. GST-registered companies could, for instance, receive capital against their issued e-invoices and other information collateral in special accounts opened via a controlled conduit such as GIFT City, which is one of India’s favoured bridges to international markets, it further said.
“The companies benefiting will need to explicitly consent to sharing their information and receiving funds into a new account at system-level while capturing cash flows against invoices for repayment. Inflows of global crypto-capital into Indian SMEs could also enable the rest of the credit system to migrate to informational collateral-based lending,” the blog said.